The terrorist group has been able to hold on to some of the
territory in Iraq and Syria that it first seized in 2014, when
its rampage across the Middle East shocked the world.

But since then, ISIS's self-declared caliphate — the
increasingly fractured swath of territory it controls and
rules as an Islamic emirate — has shrunk. The group — aka the
Islamic State, ISIL, or Daesh — has attracted thousands of
fighters, local and foreign, with its message of "remaining and
expanding," but it hasn't been able to make good on its promise
of world domination.

Days before ISIS's two-year anniversary of the declaration of its
caliphate, the group suffered another blow. It officially lost
control of the first major city it seized: Fallujah, Iraq.

ISIS maintains control over its major bases in Syria and Iraq —
Raqqa and Mosul, respectively — but local forces backed by a
US-led coalition are preparing to launch offensives on those
cities as well.

"This is definitely the death knell of ISIS's territoriality as
it was once known," Daveed Gartenstein-Ross, a counterterrorism
analyst and senior fellow at the Foundation for Defense of
Democracies, told Business Insider. "The caliphate as it was is
gone. They're not going to be able to hold anything like the
territory they did before."

ISIS is now looking to project power in other ways.

The group's propaganda previously urged foreigners to travel
to the caliphate and join ISIS's state-building project, but
recently, ISIS leaders have issued public statements
saying supporters can be more useful at home.

"The smallest action you do in their heartland is better and more
enduring to us than what you would if you were with us," ISIS
spokesman Abu Mohammad al-Adnani said in an audio message
released last month. "If one of you hoped to reach the Islamic
State, we wish we were in your place to punish the Crusaders day
and night."

These calls to action have inspired "lone wolf" attacks in
Western countries carried out by ISIS supporters who plan their
own attacks without any coordination with the group itself.

Switching from state-building to more traditional terrorism is
one way for ISIS to survive and stay relevant, Gartenstein-Ross
said.

People
protest against ISIS across from a makeshift memorial for victims
of the San Bernardino shooting, ahead of President Barack Obama's
visit with the victims' families in San Bernardino, California,
on December 18, 2015.Reuters/Patrick
Fallon

Lone-wolf terrorism is also more difficult to prevent, making it
likely that even as ISIS continues to lose territory, the group
will continue to exert its influence by inspiring terrorist
attacks on Western targets.

CIA director John Brennan said at a Council on Foreign Relations
event on Wednesday:

"The FBI has a real challenge because there are individuals who
could be in their home or have no interaction with other people
but will be on the internet and will be shaped and influenced by
what they're seeing in terms of this narrative.

"[They] will decide on their own, maybe with a spouse or
maybe with others or maybe alone, to carry out an attack. And if
they get their hands on a weapon or the explosive material, they
can do great damage before the signatures that are traditionally
associated with traditional terrorist groups are seen."

It doesn't appear that ISIS has given up its territorial
aspirations just yet, though. The group has been looking for
other opportunities for territorial expansion and has
established presences in some far-flung countries, including
Bangladesh, Albania, the Philippines, Kosovo, and Indonesia.

It's unclear whether ISIS has a plan to seize territory in
these countries the way it has in the Middle East. So far, ISIS's
attempts to build out its caliphate have run into trouble.

ISIS saw some initial success in Libya, where it was able to gain
control of the coastal city of Sirte. The group has established
several thousand fighters in the country and begun to build out
the infrastructure of a state in Sirte, implementing its harsh
version of Islamic Sharia law and establishing "media points" to
distribute its propaganda.

Sirte was said to be ISIS's "back-up
capital," a place where ISIS could base its operations if it
lost Raqqa or Mosul.

The Combating Terrorism Center at West Point
noted in a report earlier this year that ISIS has struggled
to expand into parts of Libya that are contested by other
militias.

Still, the decline of the caliphate doesn't necessarily spell the
end of ISIS.

Shadi Hamid, a senior fellow at the Brookings Institution, noted
in his recent book, "Islamic
Exceptionalism," that while ISIS's territorial rule likely
isn't sustainable in the long run, the group's legacy will remain
with us long after the caliphate crumbles.

He wrote: "Even if it were destroyed tomorrow morning, the
Islamic State would still stand as one of the most successful and
distinctly 'Islamist' state-building projects of recent decades."

ISIS's project also transcends state-building. Amid upheaval in
the Middle East, especially in Syria, where the civil war still
rages and seems far from resolution, there lies fertile ground
for extremist ideology to fester. Part of ISIS's success is based
in the group's marketing itself as a protector of disenfranchised
Sunnis, who are endangered by Syrian President Bashar Assad's
forces in Syria and government-backed Shiite militias in Iraq
and, to a lesser extent, Syria.

"As the Shia militias have been advancing, they've engaged in
sectarian depopulation," Gartenstein-Ross said. "The Sunni
grievances are not going away."

Cole Bunzel, a PhD candidate in Near Eastern studies at Princeton
University who previously worked for the US Department of Defense
and now writes about extremist groups, noted
earlier this month that ISIS believes the "cycle of Islamic
State decline and revival" could "simply recur" as long as the
ideology lives on.

"America's victory will once again prove illusory," Bunzel wrote,
paraphrasing a recent statement in an ISIS newsletter. "If
America seeks to claim real victory, it will have to eliminate an
'entire generation' of caliphate supporters the world over."